Tame inflation gives Fed ammo for bond-buying plan

WASHINGTON - WASHINGTON (AP) - Consumer prices barely changed for the third straight month, strengthening the Federal Reserve's hand at a time when it is defending a plan to boost the economy by buying more government debt.

Extraordinarily low inflation was a major impetus for the Fed program to spend $600 billion buying Treasury bonds. A report Wednesday from the Labor Department showed that inflation remains super-low.

A steep rise in gasoline prices drove the consumer price index up 0.2 percent in October, the fourth straight monthly increase. But excluding volatile food and energy costs, core consumer prices were unchanged for the third straight month. In the past year, the core index has risen only 0.6 percent, the smallest increase since the index began in 1957.

The data also comes on the same day the Commerce Department said construction of new homes and apartments sank 11.7 percent last month to a seasonally adjusted annual rate of 519,000 units. That was mainly because apartment construction, which represents less than 20 percent of the housing market, fell by more than 40 percent. The much larger single-family home category fell 1.1 percent.

Still, the drop reduced the pace of home construction to its weakest point since April 2009, when it reached the lowest level on records dating to 1959. Construction of new homes and apartments is 77 percent below its peak during the housing boom of 2.27 million units in January 2006. Analysts say it could be years before it returns to a healthy pace of 1 million units annually.

The weak housing market has served as a major drag on the broader economy, which has kept a lid on prices. Consumers, facing high unemployment and stagnant wage growth, are restraining their spending. Retailers and other companies don't want to risk losing frugal shoppers by raising prices.

Many leading Republican economists and lawmakers have criticized the Fed's bond-buying program, saying it could lead to runaway inflation. Some contend the central bank is essentially printing money to lower the value of the dollar and make U.S. goods cheaper overseas.

But other economists say the bigger threat to the U.S. economy is deflation, a widespread drop in prices and wages that could further erode home values and cripple an already weak economy. The nation hasn't grappled with deflation since the Great Depression.

"The data is definitely in the Fed's camp today and should help keep the Fed's critics at bay," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubish. "There is nothing in this data that would push the Fed off its course of continuing to buy government securities. Inflation is getting closer to becoming deflation and the recovery in housing seems to have been aborted."

A troublesome sign in the October report were price declines on new cars and clothing.

While flat prices may seem like a good thing for shoppers, the Fed would like to see prices rise more quickly to keep deflation at bay. When it announced the bond-buying program, the central bank said inflation is "somewhat low" compared to levels it considers consistent with price stability.

"For now, the data continue to show that price declines, not increases, is the concern of the day," Dan Greenhaus, chief economic strategist at Miller Tabak, said in a note to clients.

Construction activity is typically needed to pull the economy out of a downturn. But the industry has been struggling in recent months, mainly because a huge backlog of foreclosed properties has lowered home prices and made it difficult for builders to compete.

Each new home built creates, on average, the equivalent of three jobs for a year and generate about $90,000 in taxes, according to the National Association of Home Builders.

Applications for building permits, a strong indicator of future construction, rose 0.5 percent in October to an annual rate of 550,000 units. However, this small increase recouped only a part of a 4.2 percent decline in September.

High unemployment, slow job growth and tight credit have kept people from buying homes. Sales of new homes hit the lowest level in more than a decade this summer after a federal homebuyer tax credit expired in April.

By region of the country, housing construction fell the most last month in the West. It dropped 30.5 percent there. Construction fell 13.4 percent in the South. It rose 12.9 percent in the Northeast and 1 percent in the Midwest.

The National Association of Home Builders reported Tuesday that its monthly index of builders' sentiment remained in the doldrums with a reading of 16 in November, up only slightly from an October reading of 15.

Index levels below 50 are seen as reflecting a negative outlook for housing on the part of the builders. The last time the index was above 50 was in April 2006.